Euro Declines After Bund Auction, Hungary CDS Soars To Record, Massive New Issue Discount In UniCredit Stock Sale

All eyes were on Germany this morning, where up to €5 billion in new 10 Year Bunds would hit the market, with many dreading a repeat of November's failed auction. As it turns out, the auction was a success in relative terms, with the government getting bids of €5.14 billion or more than the desired maximum - something it could not do two months ago. At the end of the day, Germany sold €4.06 billion and the resulting bid/cover ratio of 1.3 was well higher than the failed auction of November which came at  1.1, when a large amount of paper was retained and bids were not enough to cover the amount of paper on offer. Wednesday's auction is still below the average of 1.54 seen at 10-year sales in 2011 and a 19 percent retention rate is also above the 2011 average. In other words, as we suggested, the November failure has nothing to do with the Buba pushing the ECB into auction and everything to do with prevailing rates: the average yield dropped to 1.93 percent from 1.98 percent but the dwindling returns on offer due to the sharp rally in safe-haven assets as the euro zone debt crisis has intensified have led to lower than average demand at recent German auctions. And while the auction was better than expected it was still quite weak, which explains why the EURUSD is trading at overnight lows, back at around 1.2980. Not helping things is Hungary, which had a failed bond auction last week, and whose IMF rescue package is now in tatters. As a result the CDS on the country just hit an all time record 688 bps and moving much wider, while the forint dropped to record lows. As everyone knows if Hungary falls, which is now operating in a bailoutless vacuum, Austria will tumble promptly next. Next, leading to a blow out in Spanish-Bund spreads is a report in Spanish Expansion which said that Spain may request EU, IMF loans to help banks. In other words - this morning's news shows a potential risk reflaring in the European core, periphery and deep periphery which was immune until now. And finally, a UniCredit €7.5 billion new stock issue pricing at a whopping 43% discount to market price shows that fair value of actual demand for European banks is about half of where the artificially propped up price is (recall Europe still has a short selling ban)

Market summary from Bloomberg:

  • S&P 500 futures down 0.26% to 1268.8
  • Stoxx 600 down 0.45% to 249.93
  • US 10Yr yield up 1bps to 1.95%
  • German 10Yr yield up 1bps to 1.91%
  • MSCI Asia Pacific up 0.97% to 116.49
  • Gold spot down 0.27% to $1599.18/oz
  • 9/10 sectors fall led by financials, consumer, utility stocks
  • French Nov. consumer spending -0.1% vs 0.3% est.
  • Eurozone final Dec. PMI composite 48.3 vs 47.9 est.
  • Eurozone Dec. CPI estimate 2.8% inline with ests.
  • Movers on earnings/statements: VESTAS WIND SYST -15.3% , DOMINO’S PIZZA +6.45% , NEXT PLC -3.47% , UNICREDIT SPA - 8.53%
  • Other gainers: MARINE HARVEST +4.84% , QIAGEN NV +4.74% , MICRO FOCUS INTL +4.13% , NATIXIS +3.27% , RENEWABLE ENERGY   +3.13% , PREMIER OIL PLC +3.07% , EFG EUROBANK ERG +2.88%, NATL BANK GREECE +2.05%
  • Other decliners: BANCO COM PORT-R -6% , BANCO ESPIRITO-R -4.99% , BANCO SANTANDER -4.73% , EDF -4.45% , GAMESA -4% , HOME RETAIL GROU -3.93% , BANCA MONTE DEI -3.87% , BANCA POP EMILIA -3.8%

Hungarian CDS:

Instant analyst reaction to Bund auction:



"It looks solid - there's nothing surprising. (The bid/cover ratio) was above one, which the market will see as a decent start for the year because the previous one in November was a shocking one. Good redemptions helped it despite a slight risk-on mood today."


"It's a lot better than last time but it's still not exactly overwhelming but that's not surprising given where yields are.

"We have to keep this in perspective. for all that Germany is actually issuing slightly less paper this year, for all that it is a safe-haven, the fact of the matter is inflation is in the high 2s still and a yield of 1.93 (percent) over 10 years doesn't get you anything in real terms."


"Much better than November's auction, but not particularly great either. Technically the auction was covered (5.14 bln euros for a 5 bln euro auction) but the average price of 100.62 in this morning's 100.58-101.08 range is not that great, coming in very close to the lows. The 5 cent tail is OK at best, but having said that, considerably better than the 14 cent tail at the previous auction."


"It doesn't look particularly well, just because we have just over 5 billion in bids, so nothing impressive."

"From a relative value perspective, the bond was expensive compared to the German curve. It's not a good auction, but it's not a surprise. For a good auction we need a pronounced flight to quality environment which we didn't get in the past couple of days."


"This time the auction went smoothly, supported by the fact that the street was short the bond that traded around -1 percent in repo ahead of the auction... Today's auction with a retention rate of 18.9 percent is very much back in line with 'more normal' auction results."